Tim Nesbitt: Limiting tax breaks could help fund Oregon's schools

Mitt Romney got my attention in the first presidential debate this year when he proposed capping tax deductions as a way to balance the federal budget -- because that's an idea first proposed by progressive groups in Oregon more than a decade ago.

During that first debate and in earlier interviews, Romney proposed limits on income tax deductions in the range of $17,000 to $50,000 per taxpayer. Republicans in the U.S. House of Representatives have since taken up the idea, which is still on the table in the negotiations over revenue options to avoid the fiscal cliff. So maybe this concept could have bipartisan appeal in the Oregon Legislature, where lawmakers from both parties will be trying to squeeze more funding for schools from the stone of the state budget.

The Legislature has made a run at curbing tax breaks several times in the past 15 years, after the Oregon Tax Justice Coalition trumpeted the finding that the state and its local governments give away more revenue in the form of tax breaks every year than they collect in income and property taxes combined. That's still the case. And these two taxes are the mainstays of our support for education in Oregon. So tax breaks controlled by the Legislature are a prime cause of revenue losses -- and a potential source of revenue gains -- for schools.

In 2003, the Oregon House Revenue Committee undertook a comprehensive review of tax breaks and ended up canceling just one of more 100 property tax exemptions -- a write-off for commercial crab pots. Subsequent efforts haven't fared much better. A 2009 law now requires an affirmative vote to reauthorize long lists of tax credits that come up for review every two years. As a result, the 2013 Legislature will review a list of 19 tax credits, subtractions and exemptions. But Gov. John Kitzhaber has recommended reauthorizing all of these tax breaks, and even increasing one for low-wage working families, so it is unlikely that any of them will be deep-sixed with the crab pots.

Once given, tax breaks are hard to take back. Every tax break was designed to accomplish a public purpose and has a vocal constituency to remind legislators of that purpose. This is why Romney's proposal for keeping all tax breaks on the books but limiting their use makes political sense.

But, unlike the federal government, we have a balanced budget in Oregon. So it's going to take other motivations for Republicans to warm to this idea at the state level. School funding only goes so far. Another motive with unique appeal to Republicans is to pare back income tax rates on capital gains. Since higher-income taxpayers who pocket the bulk of capital gains would bear the brunt of the Romney proposal, I expect Republicans here would want to couple any reform of income tax breaks with a reduction in capital gains taxes. And there are Democrats willing to entertain that idea.

So does Romney's proposal at the federal level offer the basis for a grand bargain at the state level by addressing both the overuse of tax breaks and the underfunding of schools? One flaw in the plan is that it would limit tax incentives for charitable giving. But that can be addressed in our state system by converting the deduction for charitable giving to a credit for large donations.

I asked Paul Warner, the Legislature's revenue officer, what the state would recoup by limiting income tax deductions to an amount in the middle of the range proposed by Romney, say $30,000. The answer: $400 million in 2013-15. By my calculations, that's enough to reduce the top income tax rate on capital gains to its pre-2010 rate of nine percent, preserve incentives for charitable giving above the $30,000 cap, hire another 500 new K-12 teachers, on top of the 500 that the governor is fighting for, and extend Oregon Opportunity grants to an additional 5,000 community college and university students.

The numbers add up, but this may be a case of the juice not being worth the squeeze in the political process -- unless something like this is done at the federal level. In that case, education advocates might do well to insist that we follow suit.

Tim Nesbitt writes on public affairs, has served as an adviser to Govs. Ted Kulongoski and John Kitzhaber, and is past president of the Oregon AFL-CIO. He writes an opinion column for The Oregonian on alternate Tuesdays.